Following the global financial crisis, regulators set out to mitigate risk in the $51 trillion shadow banking system. As a result, the Financial Stability Board (FSB) and the European Systemic Risk Board created the Securities Financing Transaction Regulation (SFTR), which was published in the Official Journal of the European Union in March 2019.
The regulation was designed to capture data on transactions where securities are used to borrow or lend cash. This includes repurchase agreements (repos), securities borrowing or lending, buy- or sell-back transactions, and margin lending. It applies to all institutions involved in non-banking financial intermediation, such as pension funds, insurance companies, credit institutions, and investment firms. SFTR also applies to third-country counterparties who engage in Securities Financing Transactions (SFT) through Europe-based subsidiaries.
As with many other financial regulations, COVID-19 has delayed the implementation of SFTR. Implementation began in April 2020 with reporting obligations required for Credit Institutions and Investment Firms. That was followed three months later for Central Counterparty Clearing Houses and Central Securities Depositories. In October, the next phase extended SFTR reporting requirements to insurance companies, funds, and pension schemes. The final phase will be implemented in January 2021 for non-financial counterparties.
In order to ensure a level playing field for competition and international convergence, SFTR follows the FSB policy framework, under which details of SFTs can be efficiently reported to trade repositories (TRs) and information on total return is disclosed to investors.
The SFTR implementation poses many challenges, and despite the similarities to European Market Infrastructure Regulation (EMIR) reporting, there are a number of complexities that need to be managed carefully. Firms are facing a data surge that their existing systems and processes (including those implemented to comply with EMIR) are not well equipped to handle – which is where the Vox FP team comes in.
Data requirements are higher in volume and complexity
The SFTR reporting template has 155 data fields, and requires companies to report any modifications, terminations, or amendments throughout the trade lifecycle, and also to report on collateral market values, collateral re-use, and margins on a daily basis.
“Our team is equipped with the regulatory knowledge and practical experience to quickly analyze clients’ systems and accommodate the requirements for their technical infrastructure, including how to consolidate the reporting activities within EMIR and SFTR,” said Vox regulatory change consultant, Jakub Klosinski. “We streamline the process and reduce cost while mitigating resource constraints for our clients.”
SFTR also requires the reconciliation of dual-sided reporting (reporting from both the borrower and the lender) to an approved TR within one day of trade. Matching reporting across different TRs is prone to inconsistencies and errors, as the information required by the regulation has to be collected and presented in a single report for each transaction, no later than the business day following the transaction. This creates major resource issues within firms (both staffing and budgetary), particularly if there is replicated data that needs to be reconciled.
According to the financial technology site bobsguide, the money banks expect to put towards complying with SFTR is substantial – an average of £40m (£48m for tier one banks). “Our clients look to us to help them manage the ongoing process and reduce the cost of compliance,” Klosinski said.
The SFTR reporting framework isn’t completely new to investment firms and banks. Many face similar requirements for trade reporting under EMIR, which has had rules in place since 2012. EMIR requires dual-sided reporting by the next day with a full set of data in a single report and demands that records are kept for five years, which is the same requirement as SFTR. However, the challenge SFTR presents is of a different order of magnitude in terms of the amount of data required and time needed to gather it, compared to previous transaction reporting regulations.
So, what’s the upside?
“It’s safe to say that most participants would encourage a more controlled and better-functioning market, but they also agree that the challenges of reporting are greater than the opportunities,” said Klosinski.
However, some firms recognize that the increased reconciliations required by SFTR create some operational benefits, such as a reduction in settlement failure due to the identification of mismatches in price, quantity, or value.
Many organizations are well on the way to delivering the first three phases with the fourth phase in hand, but at what operational cost going forward? The solutions and processes put in place for initial SFTR adherence were not always ideal, due to compressed timelines, limited available resources, and other external factors. The Vox team are experts in financial regulation with excellent project and change management capabilities. Our approach helps banks and investment firms reduce the resource burden and ongoing cost of adhering to SFTR in a number of ways.
Reducing manual reconciliation and adjustments by maximizing the quality of the data gathered from clients and sourced from corporate systems, and enriching the data sets to anticipate potential changes to reporting agreements. (This is relevant for Brexit, where some of the SFTR obligations will be retained and others changed.)
Leveraging and consolidating the SFTR reporting process with other existing regulations that have similar data requirements, such as EMIR or MiFID.
Streamlining the onboarding of new clients, by improving communication about the reporting process to reduce client enquiries, and by improving data quality and completeness to reduce onboarding delays.
Providing high-quality, trained staff either on client premises or from our Service Delivery Centre in Belfast, Northern Ireland.
Vox has been advising clients on their go-live approach throughout the entire process and can help with remediation efforts to reduce the ongoing cost for SFTR. If you have SFTR questions or want to benefit from our experience, please contact Phil Marsden at email@example.com or visit us at www.voxfp.com for more information.